Professional Documents
Culture Documents
NEGOTIABLE INSTRUMENTS
NATURE OF NEGOTIABLE INSTRUMENTS
Commercial Functions of Negotiable Instruments (Bar 1951)
1. To supplement the current of the government and
2. To substitute for money and increase the purchasing medium.
Characteristics or features of negotiable instruments (Bar 1967)
(1) Negotiability is that quality or attribute whereby a bill, note or check
passes or may pass from hand to hand similar to money, so as to give the
holder in due course the right to hold the instrument and collect the sum
payable for himself free from defenses.
(2) Accumulation of secondary contracts as they are transferred from one hand
to another.
Negotiable Instruments and Non-negotiable instruments distinguished
Negotiable Instruments
Contains all the requisites of Sec. 1.
Non-negotiable Instruments
Does not has any, some or all of the
requisites mentioned in said law
Transferable by assignment
A transferee acquires no right no
better than his transferor
Transferred by negotiation
Holder in due course of a negotiable
instruments can have rights better
than his transferor
Prior
parties
to
a
negotiable
instruments warrant payment.
Prior
party
to
a
non-negotiable
instruments
does
not
warrant
payment but merely the legality of
his title.
Rights acquired by a bona fide transferee for value under an assignment and
the rights acquired under a negotiation distinguished (Bar 1949)
Better right
Right of recourse
Assignment
No better right than his
transferor
Has no right of recourse
for payment against
intermediate parties.
Negotiation
(if a holder in due
course) may acquire
rights better than his
predecessors
Can hold the drawer and
the indorsers liable if
the party primarily
liable does not pay.
Cabarles Notes
15
1007-Negotiable Instruments
Among such documents with limited negotiability are the following:
(1) Letter of credit it is in favor of a specified person and not to order.
(2) Treasury warrant it is payable out of a specific fund or appropriation.
(3) Postal money order it is subject to restrictions and limitations under
postal laws and regulations (only one indorsement is allowed) inconsistent
with the character of negotiable instrument.
(4) Bill of lading it is without an unconditional promise or order to pay a
sum certain in money.
(5) Certificate of stock it is also without an unconditional promise or
order to pay a sum certain in money.
(6) Warehouse receipt it is likewise without an unconditional promise or
order to pay a sum certain in money.
Principal Classes of Negotiable Instruments (Bar 1965, 1953,1951, 1949)
1. Promissory notes;
2. Bill of exchange; and
3. Check, which is just a special form of a bill of exchange.
Promissory Note is an unconditional promise in writing by one person to
another signed by the maker engaging to pay on demand or at
a fixed or determinable future time, a sum certain in money,
to order or bearer.
Bill of Exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money to
order or bearer.
Check is a bill of exchange drawn on a bank payable on demand.
Differences between a Promissory Note and a Bill of Exchange
Promissory Note
Unconditional promise
Bill of Exchange
Unconditional order
As to number of parties
As to liability of
original issuer
As to number of
presentment
As to contents
Cabarles Notes
16
1007-Negotiable Instruments
Cabarles Notes
17
1007-Negotiable Instruments
Certainty as to sum (Sec. 2)
The sum payable is a sum certain within the meaning of this act, although it
is to be paid:
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that, upon default in payment of
any installment or of interest, the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the current rate; or
(e) With costs of collection or an attorney's fee, in case payment shall not
be made at maturity.
In money
General Rule:
If some other act besides payment of money is promised or ordered, the
instrument becomes non-negotiable.
The following acts, however, do not affect negotiability:
1. Authorizes the sale of collateral securities in default;
2. Authorizes confession of judgment on default;
3. Waives the benefit of law intended to protect the debtor; and
4. allows the creditor the option to require something in lieu of money.
When payable on demand (Sec. 7) (Bar 1952)
An instrument is payable on demand
(a) When it is so expressed to be payable on demand, or at sight, or on
presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on demand.
Cabarles Notes
18
1007-Negotiable Instruments
When payable to bearer. (Sec. 9.) (Bar 1980, 1960)
The
(a)
(b)
(c)
by the
given
it is
to be
But nothing in this section shall alter or repeal any statute requiring in
certain cases the nature of the consideration to be stated in the instrument.
Rules on Dates
Cabarles Notes
19
1007-Negotiable Instruments
Effect of insertion of wrong date
The insertion of a wrong date in an undated instrument by one having knowledge
of the true date of issue or acceptance will avoid the instrument as to him
but not as to a subsequent holder in due course who may enforce the same
notwithstanding the improper date. In the hands of a holder in due course,
the date inserted even if wrong, is to be regarded as the true date. (Sec. 13)
The insertion of a wrong date constitutes a material alteration.
(1) Discrepancy between the amount in figures and that of words the words
prevail, but if the words are ambiguous, reference will be made to the
figures to fix the amount;
(2) Instrument is not dated considered dated on date of issue.
(3) Conflict between written and printed provisions written provisions
prevail.
(4) Interest Provided for, but No starting Date specified starting date is
the date of instrument, in the absence of said date, from date of issue.
Instrument Ambiguous that there is doubt whether it is a bill or a note
(Bar 1998, 1946)
The holder may treat it as a note or a bill at his option.
Rule is signature is so place upon an instrument that it is not clear in what
capacity the person making the same intended to sign. (Bar 1946)
He is deemed to be an indorser.
Rule where PN worded I promise to Pay is signed by two makers
(Bar 2001, 1969, 1946)
The parties bind themselves jointly and severally.
Cabarles Notes
20
1007-Negotiable Instruments
consists
of
an
alteration
of
by
the
material
Cabarles Notes
21
1007-Negotiable Instruments
Complete but undelivered (Bar 1961)
(1) Between immediate parties and a remote party not a holder in due course,
delivery to be effectual must be made by or under the authority of the
maker, drawer, acceptor or indorser, as the case may be;
(2) If the instrument is in the hands of a holder in due course, all prior
deliveries are conclusively presumed valid;
(3) If the instrument is out of the hands of the person who signed it, a valid
intentional delivery is disputably presumed.
Incomplete instrument not delivered (Sec. 15)
(Bar 1997, 1985, 1982, 1978, 1971)
It will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose signature was
placed thereon before delivery.
Rules where instrument incomplete and undelivered
(1) Defense even against a holder in due course.
The fact that an incomplete instrument, completed without authority, had
not been delivered, is a defense even against a holder in due course.
(2) Defense available to parties prior to delivery.
The invalidity of the above instrument is only with reference to the
parties whose signature appear on the instrument before and not after
delivery.
Absence or Failure of Consideration (Bar 1989, 1986, 1971, 1969, 1968)
(1) Absence of consideration is the total lack of consideration, no
consideration, or illegal consideration.
(2) Failure of consideration is failure to the agreed consideration to
materialize.
(3) Both absence and failure of consideration are defenses personal to the
prejudiced party, and available against any person not a holder in due
course.
Forgery (Bar 1995, 1989, 1984)
(1) Forgery is the counterfeit making or fraudulent alteration of any writing.
(2) It may consist of:
(a) Signing of anothers name with intent to defraud;
(b) Alteration of an instrument in the name, amount, description of payee,
etc. with intent to defraud;
(3) The signature is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefore, or to enforce payment
thereof against any party to it, is acquired through or under such
signature.
Cabarles Notes
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1007-Negotiable Instruments
MATERIAL ALTERATION OF INSTRUMENT (Bar 1999, 1996, 1983, 1977, 1972)
Material Alteration Defined
Any alteration which changes the
(1) date;
(2) sum payable; (Bar 1993, 1971)
(3) time and place of payment;
(4) number or relation of the parties; or
(5) medium or currency of payment; or
(6) adds a place of payment where none is specified, or
(7) which alters the effect of the instrument in any respect
is material alteration.
Effect of material alteration
A material alteration avoids the instruments except as against the party who
made, authorized or assented to the alteration, and subsequent
indorsers.
Where the altered instrument, however, is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof
according to its original tenor.
ACCOMMODATION
(Bar 1996, 1993, 1991, 1990, 1985, 1976, 1975, 1971, 1964,1952)
Accommodation is a legal arrangement under which a person
accommodation party lends his name and credit to another
accommodated party, without consideration.
called
called
the
the
Cabarles Notes
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1007-Negotiable Instruments
Against the Co-accommodation party
The Negotiable Instruments Law does not define the right of an accommodation
maker to seek reimbursement from another accommodation maker, this deficiency
should be supplied by Art. 2073 of the New Civil Code.
Where a solidary
accommodation maker paid to the bank the balance due on a promissory note, he
may seek contribution from the other solidary accommodation maker, in the
absence of a contrary agreement between them.
A solidary accommodation maker
(1) may demand from the principal debtor reimbursement of the amount which
he paid on the promissory note, and
(2) he may demand contribution from his co-accommodation maker, without
first directing his action against the principal debtor, provided that
(a) he made the payment by virtue of a judicial demand; or\
(b) the principal debtor is insolvent.
FORGERY OF CHECKS
Forged signature (Sec. 23)
When a signature is forged or made without the authority of the person whose
signature it purports to be,
a) it is wholly inoperative, and
b) no right to retain the instrument, or
c) to give a discharge therefor, or
d) to enforce payment thereof against any party thereto, can be acquired
through or under such signature,
e) unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Cabarles Notes
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1007-Negotiable Instruments
Effect of Forger of the signature of indorser
The loss will be borne by the
(1) Forger or
(2) By party subsequent to said forger
(3) Including the collecting bank where the check was eventually deposited.
Right of drawee bank to debit the account of the drawer in case of forger of
signature of indorser
The drawee bank may debit the drawers account. While the drawee bank must be
cautious in the scrutiny of the signatures of drawers of checks drawn on it
under the theory that it should know the signatures of its own clients, it has
however no responsibility for the signatures of indorsers, the payee being one
of them.
In banking practice, the signatures of the indorsers, as a prerequisite to
clearing, are guaranteed by the bank where the check may be deposited by the
last holder.
If any of these indorsements are forgeries, immediate
responsibility will be on that bank which guaranteed the indorsements, not on
the drawee bank of the check.
Cabarles Notes
25
1007-Negotiable Instruments
Meaning of procuration
Procuration is the act by which a principal gives power to another to act in
his place as he could himself.
It is ordinarily understood in the same sense
as agency or proxy, for one who signs is merely acting as agent for another.
Cabarles Notes
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1007-Negotiable Instruments
LIABILITIES OF PARTIES
Parties Primarily Liable (Bar 1999, 1947)
(1) Maker;
(2) Acceptor or the Drawee Who Accepts the Instruments;
Warranty of the Maker
(1) Engages to pay according to the tenor of the instrument;
(2) Admits the existence of the payee and his capacity to indorse.
Warranty of the Acceptor or the Drawee who accepts the instrument
(1) Engages to pay according to the tenor of his acceptance;
(2) Admits the existence of the drawer, the genuineness of his signature, and
his capacity and authority to draw the instrument.
(3) Admits the existence of the payee and his capacity to indorse.
Cabarles Notes
27
1007-Negotiable Instruments
Parties with Limited Liability
(1) The qualified indorser;
(2) Person negotiating by delivery.
Warranties of a Qualified Indorser (1946)
(1) That the instrument is genuine and in all respects what is purports to be;
(2) That he has good title to it;
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would impair the validity of
the instrument, or render it valueless.
A qualified indorsement constitutes the indorser a mere assignor of the title
to the indorser a mere assignor of the title to the instrument. It may made
by adding to the indorsers signature the works without recourse or any word
of similar import.
Warranties Negotiating by Delivery (Bar 1979)
(1) Warranties same as those of a qualified indorser;
(2) Warranties extend to immediate transferee only.
Cabarles Notes
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1007-Negotiable Instruments
By indorsement followed
by delivery
When applicable
Instrument is originally payable to bearer
or
Originally payable to order where last indorsement is
in black
Instrument payable to the order specified person.
Cabarles Notes
29
1007-Negotiable Instruments
Qualified indorsement is one where the indorser places under his signature
the words without recourse or the like.
The
qualified indorser does not become liable secondarily
under his indorsement.
Regular indorsement is one placed after the issue of the instrument.
Irregular indorsement is one placed in blank before the issue of the
instrument.
Striking Out of Indorsements
The holder may strike out indorsements not necessary to his title.
The
indorser whose indorsement is struck out and all indorsers subsequent to him
are relieved from liability on the instruments.
RIGHTS OF HOLDER
Rights of Holder in General
The holder of a negotiable instrument may sue thereunder in his own name, and
payment to him in due course discharges the instrument.
Classes of Holders
(1) Holder in Due Course;
(2) Holder not in due Course.
What constitute a holder for value. (Sec. 26)
A holder for value is one who has given a valuable consideration for the
instrument issued or negotiated to him. The holder is deemed as such not only
as regards the party to whom value has been given by him but also in respect
to all those who became parties prior to the time value was given.
A holder of a negotiable instrument is presumed to be a holder for value until
the contrary be shown by any party who claims otherwise.
Requisites to be a holder in due course
(1) Who takes the instrument in good faith and for value;
(2) At the time the instrument was negotiated to him he nod no notice of any
defect in the title of the person negotiating it;
(3) Provides that every that every holder is deemed prima facie to be a holder
in due course.
When is a holder of an instruments a holder in due course
(Bar 2000, 1996, 1992, 1966, 1952, 1946)
A holder in due course is a holder who has taken the instrument under the
following conditions:
(1) that it is complete and regular upon its face;
(2) that he became the holder of it before it was overdue and without notice
that it had been previously dishonored if such was the fact;
(3) that he took it for value and in good faith;
(4) that at the time was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
Cabarles Notes
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1007-Negotiable Instruments
Rights of a holder in Due Course (Bar 1996, 1946)
Like any holder, a holder in due course may enforce the instrument and sue
thereon in his own name.
(1) He holds the instrument free from any defect of title of prior parties;
(2) Free fron defenses of prior parties among themselves, and
(3) He may enforce payment of the instrument for full amount thereof,
against all parties liable thereon.
Cabarles Notes
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1007-Negotiable Instruments
The defense is available against all holders not in due course, except those
who derive their rights from holders in due course and who are not parties to
any fraud or illegality affecting the instrument.
PRESENTMENT
PROMISSORY NOTES
Purpose of Presentment for Payment
Not necessary to make the maker liable, but it is necessary to make the
secondary parties liable.
Requisites of Presentment (Bar 2000)
(1) Made within a reasonable time after issue;
(2) By the holder or his agent;
(3) To the party liable under it;
(4) At a reasonable hour on a business day; and
(5) At the proper place.
The holder must exhibit the instrument to the debtor and should deliver it to
said debtor if the latter pays.
When Presentment is not Required
(1) When after due diligence presentment cannot be made;
(2) When presentment is waived, and
(3) When the indorser is an accommodated party.
When Instrument Considered Dishonored
(1) When after due presentment for payment, payment is refused, and
(2) When presentment being excused, the instrument is overdue and unpaid.
IN BILLS OF EXCHANGE
Kinds of Presentment in bills of Exchange
1. Presentment for acceptance and
2. Presentment for payment.
PRESENTMENT FOR ACCEPTANCE OF A BILL (Bar 1994)
Purpse
To gent acceptance of the drawee for the purpose of making him liable
primarily as an acceptor.
It is also a prerequisite to the accrual of
secondary liability against the drawer and the indorsers.
When Necessary
(1) To fix the maturity date;
(2) Where the bill expressly stipulates presentment
(3) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
Requisites
Presentment for acceptance must be made within a reasonable time, by the
holder or his agent, to the drawee or his agent at a reasonable hour on a
business day, before the bill is overdue.
When Presentment for Acceptance is Excused
Cabarles Notes
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1007-Negotiable Instruments
Presentment for acceptance is excused:
(1) where the drawee is dead, hides, or is a fictitious or incapacitated
person;
(2) when after due diligence, presentment cannot be made;
(3) when acceptance is refused on another ground although presentment is
irregular.
When instrument Dishonored by Non-acceptance
The instrument is considered dishonored by non-acceptance:
(1) where such acceptance is refused or cannot be obtained; and
(2) where acceptance being excused, the bill is not accepted.
PRESENTMENT FOR PAYMENT OF ACCEPTED BILL
Purpose
The purpose of presentment for payment of an accepted bill is to collect from
the acceptor, and if refused, to collect from the secondary parties.
Requisites
The accepted bill must be presented for payment within a reasonable time from
the last negotiation by the holder or his agent, to the acceptor or his agent,
at a reasonable hour on a business day, and the proper place as defined. The
bill must be exhibited to the acceptor and surrendered to him when he pays.
When Excused
Presentment for payment is excused:
(1) when after due diligence, it cannot be made
(2) when the drawee is a fictitious person, and
(3) where there is a waiver of presentment.
Cabarles Notes
33
The acceptance
1007-Negotiable Instruments
(a)
(b)
(c)
(d)
(e)
Conditional;
Partial
Local
Qualified as to time
Accepted by some or more of the drawees but not by
all
DISHONOR
Dishonor in Promissory Notes
In a promissory note, dishonor by non-payment takes place when it is duly
presented for payment and payment is refused or cannot be obtained; or if
presentment is excused, the instrument is overdue and unpaid.
NOTICE OF DISHONOR
Defined
It is a notice given by the holder or his agent to the party or parties
secondarily liable that the instrument was dishonored by non-acceptance by the
drawee of a bill, or by non-payment by the acceptor of a bill or by nonpayment by the maker of a note.
Purpose
The notice of dishonor is given by the holder to the parties secondarily
liable, for the purpose of preserving his right of recourse against them.
Requisites
The notice
(1) by the
holder
(2) to the
(3) within
(4) at the
is given:
holder or his agent, or by any party who may be compelled by the
to pay;
secondary party or his agent
the periods provided for by law and
proper place.
Cabarles Notes
34
1007-Negotiable Instruments
(3) when the party to be notified knows about the dishonor, actually or
constructively.
When notice of dishonor not required to be given to the Drawer
(1) when the drawer and the drawee are the same person;
(2) when the drawee is a fictitious or incapacitated person;
(3) when the drawer is the person to whom the instrument is presented for
payment;
(4) when the drawer has no right to expect that the drawee will accept, or
that the acceptor will pay, the instrument.
When notice of dishonor not required to be given to the Indorser
(1) when the drawee is a fictitious or incapacitated person and the indorser
was aware of it at the time of his indorsement;
(2) where the indorser is the person to whom the instrument was presented for
payment, and
(3) where the instrument was made or accepted for his accommodation.
PROTEST
Protest Defined
A protest is a formal instrument, executed by a notary or other competent
person, certifying that the facts necessary to the dishonor of the instrument
by non-acceptance or non-payment have taken place.
When Required
When a foreign bill
non-acceptance. If
payment. If not so
must be made on the
security.
Cabarles Notes
35
1007-Negotiable Instruments
When Protest Dispensed with
Protest is dispensed with in those cases where notice of dishonor is dispensed
with.
FOREIGN BILLS
Acceptance for Honor (Acceptance Supra Protest) Defined
It is an undertaking by a stranger to the bill after protest, for the benefit
of all parties subsequent to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due, if the original drawee does
not pay it.
Payment for Honor (Payment Supra Protest) Defined
A payment for honor is a payment made through a notarial act of honor of a
party liable under, or a stranger to the bill after, said bill had been
dishonored by non-payment by the acceptor and protested for non-payment by the
holder.
Legal Consequences
(1) all parties subsequent to the party for whose honor payment is made
are discharged; and
(2) the payer for honor is subrogated and succeeds to both.
The rights
and duties of the holder, as regards the party for whose honor payment
is made, and all parties liable to the latter.
A bill in a set is a bill of exchange drawn in several parts, each part of the
set being numbered and containing a reference to the other parts, the whole of
the parts constituting just one bill.
Liability under the Bill
The acceptance and payment of one part discharges all parts, as a general
rule.
There are, however, instances where more than one liability may attach to the
whole of the set, and these are:
(a) where more than one part is negotiated by the same holder; and
(b) where the drawee accepts one part, but pays the unaccepted part.
Cabarles Notes
36
1007-Negotiable Instruments
CHECK
Check Defined
A check is a bill of exchange drawn on a bank and payable on demand.
Difference between a check and an ordinary bill of exchange
1. As to drawee
Check
Always a bank
Ordinary Bill
Any capacitated person
2. As to demandability
A bill need
payable
3. As to discharge of
indorsers and drawer
A certified check or
accepted, the drawer and
indorsers are
discharged.
not
be
so
Cabarles Notes
37
1007-Negotiable Instruments
Effects of a crossed Checks
The effects of crossing a check are as follows:
(1) the check may not be encashed but only deposited in a bank;
(2) the check may be negotiated only once to one who has an account with
a bank;
(3) the act of crossing a check serves as a warning to the holder that the
check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose.
Cabarles Notes
38